The Price of the Iraq War:  A Worldwide Economic Correction

by Bill Butler

Exclusive to STR

March 12, 2009

What happens when you are the world’s sole superpower and you abuse that prestigious position to invade a small, relatively defenseless sovereign foreign country based on false pretenses?  What if instead of your stated reasons your true motive is to protect the position of your private central bank’s currency as the world’s reserve currency?   What if the invaded country’s real “weapon of mass destruction” that will destroy your country’s debt-fueled, Welfare-Warfare addicted “way of life” is the free will decision of that country’s odious, former-puppet leader to reject your currency in favor of some other currency?  In short, what if all that purposeful violence was all about the Benjamins?   Hmm, I wonder.    

Recall that in the midst of the Iraq war many pundits and war cheerleaders were complaining that Americans were not “sacrificing” enough for the war effort?  Well, they got their wish.  That we are now in a worldwide economic depression—better termed a correction, as that term implies a change of course from past error—is beyond dispute.  For those who disagree about the motive and the consequences, allow me to explain.  

MOTIVE

When looking for truth and motive in the machinations of social planners, it is always useful to follow the money.  Weapons of mass destruction, a neocon conspiracy, revenge for the 911 attacks, etc. are all red herrings, or at most minor contributing factors, in the list of reasons of why the US government invaded Iraq , why it remains in Iraq and why it has refused and will continue to refuse to draw down its military presence.  The US military will not leave Iraq until Iraq has a government that the US knows will accept dollars for its oil.  Everything else in our “status of forces” and “strategic framework” agreements is just window dressing.

In November of 2000, Saddam Hussein announced to the world that he would no longer accept dollars for his oil and would in the future instead accept only Euros.  It is important here to note the countries that would primarily benefit from Saddam’s decision— France and Germany .   What about Great Britain ?  No, Great Britain has never adopted the Euro.  But more on that later. 

At the very beginning of the Bush Administration in 2002, long before September 11, 2001 , the invasion of Iraq was on the table as noted by Treasury Secretary Paul O’Neil.  Recall that in 2000 Saddam had almost no military capability.  Iraq had been decimated in the first Iraq war and had also been subjected to eight years of UN inspections together with complete US control over Iraqi airspace.  Why, in 2000, would Bush be concerned about Saddam at all if Iraq was so thoroughly neutered militarily?  What “weapon” did Saddam have that could threaten Americans?  

Following 9/11, Richard Clark noted that Bush administration officials were attempting to use 9/11 as a pretext to invade Iraq.  Why?    

What if Saddam had gone through with his threat to accept only Euros, so what?  What threat is that to the dollar?  Well, since August 15, 1971 the dollar has been supported not by gold or anything tangible but rather by:  (1) petroleum producing countries’ agreement to accept only the dollar as payment for their oil; and (2) the US government’s power to tax its citizens and therefore pay interest payments on US treasury bonds.  Since 1971, every government and central bank that that has held a substantial amount of dollars and dollar-denominated assets (T-bonds) has held them in reliance that the US government would support these two premises, violently if necessary.  When Nixon closed the gold window in 1971, the dollar went on a de facto petro-tax standard.  The Federal Reserve still holds the gold, and the US government violently and ruthlessly enforces these two premises.  If the US were to allow either of these two dollar supports to fall, the dollar would collapse and the Federal Reserve system with it.  If you understand that Republicans protect the first leg and Democrats the second, you know 98 percent of everything you need to know about current American politics.   

For those who need more proof of motive, why did Germany and France not support the Iraq invasion?  Aren’t they our staunch NATO allies?  Aren’t all NATO nations mutually committed to war against any nation that presents a real and tangible threat to another member nation?  We have a written, signed treaty to support one another militarily and risk lives and treasure for one another.  That is serious business.  Why would Britain , another NATO ally, support the invasion when France and Germany did not?  The division in our NATO allies provides powerful evidence of the real motives behind the Iraq invasion.   

CAUSATION  

Irony exists when the outcome of a particular act is the opposite of what was expected.  An example of irony is employing devastating violence to protect something—e.g. the dollar—and the result of that violence is the destruction of the very thing you intend to protect.  

So how did the Iraq War cause a worldwide economic depression?  Well, you see, wars must be paid for.  You don’t need to be Henry Hazlitt to understand that.  In late 2001, the US citizenry was facing the inevitable correction of two decades of Keynesian central planning.  Those in the know saw the trend— remember the 1999 cover of Time asserting that Greenspan, Rubin and Summers had prevented a “market meltdown”?  Remember the Y2K scare?  Remember how Alan Greenspan recognized it because he was apparently a former computer programmer and didn’t contemplate the end of the century?  In 2000, the market was headed down as imperfectly evidenced by a rapidly falling Dow to Gold ratio.  If the central planners had allowed the correction to happen in 2000, it would have been difficult as the boom cycle was 20 years in the making.  But it clearly would have been more manageable than today.  The record shows that the Keynesian Iraq War stopped the correction and added an additional eight years of dislocated capital and resources to an already reversed economic cycle.   

Even with a new Pearl Harbor of 9/11, in 2002, paying for a large-scale war via a current tax was economically and politically impossible.  The correction had come but the planners refused to accept it.  So what other way is there to pay for an economically unfeasible war on a country that did not attack us?  The answer: to deficit spend and inflate the currency, to tax through inflation and devaluation of the currency.  Doing this, however, requires cooperation and assistance from the Federal Reserve in the form of a low interest rate, easy money policy.  If the Fed does not aggressively assist with a low interest rate policy, fiscal deficit spending will necessarily drive up interest rates making the politically unpalatable impossible.   

Did the Fed cooperate in supporting the Iraq War and protecting its dollar?  Obviously and unquestionably.  Austrian economist Robert Murphy has clearly shown, through its open market operations in 2002 and 2003 (buying Treasury securities in the open market) the Fed pumped $200 billion into the US system, resulting in at least $2 trillion of additional credit.  To the unwitting US citizen, this artificially low interest rate condition was like soma, the artificial drug in Aldous Huxley’s Brave New World.  No one really wants to protest a war and no one really cares about body bags, coffins, over 4,000 dead soldiers and thousands more wounded when money is easy and cheap.  Mothers who lose their sons are easily marginalized when everyone is fat and happy.   

Looking at the timeline from 1999 to the present, it is clear that the planners saw the 2000 correction coming and did other things to prevent it from happening, including repealing Glass-Steagall, pre-empting state bucket shop laws and thereby making a new market for unregulated derivatives, and facilitating the securitization and standardization of non-standard mortgage-backed securities.  Only Fed easy money policy, however, can effectively delay a correction.  The evidence shows that the Fed delayed and made deeper and more painful the current correction by supporting and promoting the unjust violence in Iraq .  The purpose of that violence was clearly to protect the Fed’s dollar. Ironic that the Fed’s support may in the end kill what it intended to protect.